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2 Attributes Of Successful Investors

Michael Mauboussin, the Director of Research for BlueMountain Capital Management and the former Head of Global Financial Strategies at Credit Suisse, is well known for writing detailed memos and articles on topics dear to my heart, such as investment processes, company-analysis techniques, and portfolio positioning.

In a piece written in August 2016, Mauboussin reflected on the top 10 attributes possessed by great investors. What’s encouraging about Mauboussin’s 10 traits are that they can be learnt and developed over time. In this article, I want to share the first two attributes – I shall be covering the rest of them in subsequent articles.

1. Be Numerate

In order to be a successful investor, we have to be numerate, meaning that we have to be comfortable looking at numbers, calculating them and using them for analysis.

However, we do not need to understand complicated math formulae or to know how to work with arcane mathematical concepts; in fact, investing requires only a basic understanding of math in areas such as ratios, percentages, and probabilities. Most people with a basic secondary school education in mathematics should be able to tackle the computations required in investing. As investors, we need to have a feel for numbers and to be able to tease out information such as year-on-year changes in revenues and profits, as well as profit margins and important metrics which demonstrate the financial strength of a company.

Numeracy is important because the world of business consists of financial statement analysis, and accounting forms the backbone of such analyses. If we are able to both understand and make sense of financial statements, it means that we can gain insights into how a business has performed in the past and also some sense as to how well it could do in the future.

2. Understand Value (Present Value Of Free Cash Flow)

Present value is a concept rooted in finance theory. It states that free cash flows, when discounted using an appropriate interest rate (also known as the “discount rate”), can yield the current value of an asset. Discounting consists of a formula which seeks to quantify the current value of cash flows that will be received in future periods. This method of determining the value of an asset which generates cash flows applies to equities, bonds, and also real estate.

The problem with the real world is that future cash flows are always uncertain, hence we as investor need to determine both the timing and amount of future cash flows, as well as the probability of the future cash flows materializing – these are daunting tasks. Reading extensively and knowing a company’s competitive moat and how well a company is doing relative to its industry are all important aspects used in determining future free cash flows.

[Editor’s note: The second and third articles in this series have been published. They can be found here and here.]

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.